Posted May 25, 2016
Nearly two-thirds of Ontario’s payday loan users turn to the controversial short-term, high-interest lenders as a last resort after exhausting all other options, according to the results of a survey released Tuesday.
The Harris poll, conducted on behalf of insolvency trustees Hoyes, Michalos & Associates Inc., found that 72 per cent of borrowers had tried to borrow from another source before taking out a payday loan and 60 per cent said fast-cash shops were a last resort.
Many payday loan users are those who would be rejected for traditional bank loans, such as a line of credit, so they turn to alternative financial services. The vast majority of respondents had existing debt, the average of which was $13,207. About a quarter of those surveyed had maxed out their credit cards.
“The vast majority of payday loan clients have loans with the traditional lenders and they’re tapped out, that’s why they’re coming to them,” said Douglas Hoyes, the insolvency firm’s co-owner.
“That would be an illustration of the debt trap.”
In Ontario, interest on payday loans is capped at $21 per $100 dollars. Expressed in annual interest rates, that amounts to 546 per cent, well above Canada’s criminal usury rate of 60 per cent. The loans are supposed to be very short term — about two weeks, which is why interest rates are not required to be expressed as annualized amounts.
The Canadian Payday Loan Association argues that it provides a bridge for consumers who are rejected by banks and would otherwise have to turn to illegal lenders.
But some borrowers get trapped in a vicious cycle, taking on more loans to pay down debt.
More than half of all users said they took out more than one loan in a year and of those, 45 per cent said their debt loads increased after taking out the payday loan.
“Once you have one it’s very difficult to pay off unless you get another,” Hoyes said.
About 18 per cent of Hoyes’ bankrupt clients have payday loans — and they carry an average of 3.5 of them, he said.
The provincial government is reviewing whether to reduce how much borrowers should pay in interest on a payday loan to as low as $15 per $100. The new Alternative Financial Services bill, if passed, will also give repeat payday loan users longer repayment periods.
But Hoyes said that doesn’t address the underlying issues faced by people locked in fast-cash debt traps.
“The real problem is the massive levels of other debt that people have, so you’re treating the symptom, not the underlying problem.”
He believes better solutions might be to require lenders to express interest in annual terms, as is the case with other types of loans, and to report payday loans to credit bureaus. That, he said, would force rejected borrowers to address their underlying debt problems, while loans that are successfully paid off will boost their credit scores.
Anti-poverty activists at ACORN have also been arguing for a database of payday loans so that users’ loans are tracked across multiple lenders. It is also pushing Toronto City Council to institute a minimum distance separation for payday lenders, which are often concentrated in low-income areas.
The online survey included 675 Ontario residents and was conducted from April 14 to April 26.
By the numbers:
83% — The percentage of payday loan users who had other debt already
72 %-- The amount of borrowers who tried another source before payday loans
48% — Of survey respondents said they sought out a payday loan because of the amount of debt they carry
46% — The percentage of borrowers who said taking on a payday loan made it easier to keep up with debt repayments
546% — Ontario’s capped interest rate on payday loans, expressed as an annual percentage.
55% — The percentage of payday loan users who take out more than one payday loan in a year.
Article by Sunny Freeman for the Toronto Star